Online banking a way to help beat inflation's bite

Gregory KarpAllentown Morning Call

By now you probably know you can stash money at many institutions throughout the country, not just banks in your hometown. The Internet has created widespread access to more banks, some of which exist only online and don't have branches. Others are online divisions of traditional banks.

Are you still using a bank just because it has branches near you? If so, you're probably getting a lousy deal.

The idea of using online banks has come of age and today offers the best deals in banking. Because an online bank has less overhead expense, such as window tellers and bank branches, it can offer lower fees and higher interest on checking accounts. More important, yields on savings accounts are vastly higher, often eight to 10 times more than what regular banks are paying.

Online bank yields are like investing's Holy Grail, said Greg McBride, an analyst with Bankrate.com, an online source of banking information and comparisons.

"You're getting additional return, and you're not having to take additional risk," he said. "That's a trade not found elsewhere in financial markets. You're leaving money on the table if you're just going to settle for what the local bank is offering you."

So if you're still using a large brick-and-mortar bank, now is the time to switch. If a lack of knowledge and comfort are holding you back, here are some questions and answers.

-- Is my money safe? Yes. As long as the bank's deposits are insured by the Federal Deposit Insurance Corp., you're just as safe as if you used the bank down the street. FDIC insurance guarantees deposits up to $100,000. Go to www.fdic.gov/deposit to determine whether a bank is federally insured. Many of the good deals are with online banking divisions of traditional banks with long corporate histories.

-- How do I deposit money? Several ways, depending on the bank you choose. The easiest is to transfer money electronically from another bank account by providing a bank routing number. For your initial deposit, the bank may make trial deposits into your account that you have to verify for security reasons. Also, most banks accept direct paycheck deposits from an employer. And many accept a personal check by mail. Once the account is established, you can mail in deposits of items such as rebate checks.

-- How do I withdraw money? It depends on the bank, but options include check-writing privileges on the account and debit cards, both of which give you immediate access to your money. Many offer electronic transfers to another account, although that might take three business days to process. And some even let you use ATMs located at other banks, convenience stores and other locations. If ATM access is important to you, be sure to find out about fees. Some will reimburse you for a certain amount of ATM fees you rack up during a month.

-- What's better about the savings accounts? The interest you earn. For example, many regular savings accounts are yielding about 0.5 percent. But several online banks are offering more than 5 percent interest. Overall, the idea is to at least beat inflation, which erodes the spending power of your cash. "You can easily do that if you're pursuing the highest yields," McBride said. "If you settle for what your local bank offers, you're probably trailing inflation."

Such savings accounts are ideal for rainy-day funds, which financial experts say should equal three to six months of expenses. A $20,000 emergency fund would earn about $100 a year at a traditional bank, while an online savings account would yield about $1,000 annually.

-- What's better about the checking accounts? Online banks typically offer interest on checking accounts and don't charge fees. Many also offer free electronic bill-paying services, where you can set up to pay a bill electronically, sans the check writing, envelope addressing and postage stamp.

-- Do I need a lot of money to start? No. Most accounts have very low initial minimum deposits, perhaps $50 or less. And it's quick. Opening an account online should take only about 10 minutes.

-- When can I do my online banking? Anytime. You could make deposits and withdrawals at midnight in your pajamas from a home computer. There's no such thing as bank hours.

-- Will I be more vulnerable to identity theft? Not really. More identities are stolen by people the victims know or by more traditional means, such as thieves stealing mail from mailboxes, than from secure electronic transactions.

-- I'm not too skilled with computers. Is it difficult? Most Web sites are easy to use. Some banks offer help by telephone. And you can open some accounts by mailing a check.

-- Can I ease into it? Yes. Take baby steps by first opening a savings account with an online bank or out-of-state bank. Deposit just a few hundred dollars until you get more comfortable with it. Consider accounts at HSBCDirect.com and INGDirect.com, to name a couple that have consistently offered very high yields.

You can compare accounts at such Web sites as Bankrate.com. Meanwhile, retain your checking account with your current bank, assuming you're not paying any fees. When you get more comfortable with remote banking, you can probably find a better checking account too.

Gregory Karp is a personal finance writer for The Morning Call, Allentown, Pa., a Tribune Co. newspaper. E-mail him at yourmoney@tribune.com. For additional discussion on spending wisely, see the Spending Smart blog at http://blogs.mcall.com/spendingsmart/.